Provider Affairs Editor for Monkey Business Magazine
XYZ’s compensation for the services under its administrative services agreement(s) with certain group customers can include the difference, if any, between the net claim payments reimbursed to XYZ by the group customer and the net amounts paid to health care providers by XYZ, after giving effect to XYZ’s separate financial arrangements with health care providers.
Separate Financial Arrangements with Providers
XYZ’s compensation for the services under its administrative services agreement(s) with certain group customers can include the difference, if any, between the net claim payments reimbursed to XYZ by the group customer and the net amounts paid to health care providers by XYZ, after giving effect to XYZ’s separate financial arrangements with health care providers. (XYZ takes part of the PPO discount as a fee and does not pass on the full discount to the customer)
Currently, these differences may arise through the use of XYZ’s Average Discount Price (“ADP”). “ADP” means a percentage discount determined by XYZ, which varies from claim to claim. The ADP reflects XYZ’s reasonable estimate of average payments, discounts and/or other allowances that will result from its contracts with hospitals and other facilities under circumstances similar to those involved in the particular claim, reduced by an amount, not to exceed fifteen percent (15%) of such estimate, to reflect related lost investment earnings and costs (the amount of the reduction is referred to as the “planned retention”). (XYZ may take up to 15% of the discount as a fee)
Although the maximum planned retention can be up to 15%, the planned retention is often much lower and will vary from year to year, as more fully described below. XYZ has negotiated with participating facility providers to pay the providers full billed charges of their claims upfront, and then recover from the providers the actual contractual savings at a later date.
In that situation, XYZ has lost the opportunity to invest and earn interest on the amount it advances to the provider. XYZ retains a small percentage of the contractual savings for administrative expense and lost investment income, which is captured in the reduced ADP amounts credited to the group customer.
This is because the value of the discount is made immediately available to the group members even though XYZ recovers the actual savings from the provider months later. The planned retention is the sum of the interest rate (prime rate determined at beginning of each quarter) times the collection lag (2/12 months for PPO; 15/12 months for non-PPO), and a flat charge of 0.5% for administration.
So, if the prime rate is 3%, then the retention is approximately 1.0%. The group’s liability to XYZ for certain facility claims payment is calculated, in part, based on ADP instead of the actual savings from the contract that XYZ has negotiated with the facility.
The difference between the actual discounts and ADPs for any given group customer will vary, depending on the health care services received by the group’s members, and can be positive or negative.
An estimate of the difference can be calculated by multiplying the Estimated Provider Recoveries Percentage (published quarterly by XYZ) by the group customer’s covered charges (provided by XYZ on the monthly invoices to group customers) and then subtracting the ADPs (also on the monthly invoices).
Note: XYZ Insurance Company is fictional, the disclosure is not.